BRASILIA, March 3 (Reuters) - Brazil's Senate on Tuesday threw out a presidential decree that reduces payroll tax breaks for businesses, in a political setback for President Dilma Rousseff's new fiscal austerity crusade.
The Senate's president Renan Calheiros said the matter was not urgent and should be presented to Congress in a bill rather than a temporary decree that bypasses lawmakers.
Rousseff immediately responded by sending Congress a legislative proposal to trim the tax breaks, saying the change does not hamper the government's fiscal savings plan.
The decree has immediate effect, but needs to be approved by Congress within 60 days to become law and can be extended for another 60 days before it expires.
In an action applauded by financial markets, Rousseff on Friday moved to pare back tax breaks on payrolls and export revenues to save the government up to 7 billion reais ($2.39 billion) this year and reduce its widening budget deficit.
The new-found fiscal rigor threatens to tip the Brazilian economy into a deep recession, raising opposition from lawmakers and even senior members of her own Workers' Party who want to water down the savings measures.
Since her narrow re-election win in October, Rousseff has made a dramatic U-turn in economic policy to regain the trust of investors worried with the financial health of an economy that until recently was one of the world's most dynamic.
Calheiros, a member of Rousseff's main ally in Congress, the PMDB party, said her government was trampling on the constitutional right of Congress to legislate on important matters that affect Brazilians, such as raising taxes.
Opposition leaders praised Calheiros' decision to assert the independence of the Senate, which will make it harder for Rousseff to push through belt-tightening legislation needed to avoid a credit rating downgrade.
The surprise move by Calheiros, who has been a loyal ally to Rousseff during her first term, comes at a time of tension in Congress where politicians are worried that they will be implicated in a corruption scandal engulfing state-run oil company Petroleo Brasileiro SA.
One of other measures under fire includes a controversial decree that trims unemployment and pension benefits to save state coffers about 18 billion reais this year. ($1 = 2.9303 Brazilian reais) (Reporting by Alonso Soto and Anthony Boadle; editing by Gunna Dickson)